Having Some Ups And Downs: Market See-Saw Ride Seen Likely To Continue

After Monday’s losses, stocks appeared on the rebound Tuesday following overnight gains in Europe and Japan. Meanwhile, a Fed meeting starts today with futures prices indicating another hike, and Nike Inc. (NYSE: NKE) results await investors after the closing bell.

Want Drama? Not Much At Fed

Fed leaders gather in Washington, D.C., today to confer about the economy while the rest of us wait for their rate decision tomorrow. That decision doesn’t seem too hard to predict, since futures prices indicate a better than nine in 10 chance of a 25-basis point hike—the third this year—but the market might still act a little lethargic today and tomorrow ahead of that announcement.

The Fed has said it plans to hike rates gradually, but futures prices project about a 6 percent chance of a 50-basis point hike Wednesday. Just something to consider having in mind as the decision approaches, though it seems highly unlikely. The Fed would have to see something most analysts don’t to make a dramatic move like that.

The other big event early this week could be NKE earnings. The stock is trading at all-time highs heading into the report, up 34.8 percent year-to-date. For the quarter, NKE is expected to report adjusted EPS of $0.62 on revenue of $9.93 billion, according to third-party consensus analyst estimates. In the same quarter last year, adjusted EPS came in at $0.57 on $9.07 billion in revenue.

The rise in the U.S. dollar is one factor that analysts expect to weigh on this quarter’s report, because about 60 percent of the company’s sales are international. Another factor to consider watching is North American sales, which recently returned to positive growth.

When Draghi Speaks...

Overseas news hit the U.S. market around midday Monday as investors digested the latest words from European Central Bank President Mario Draghi. His remarks, in which he said he sees a “relatively vigorous” pickup in underlying euro-area inflation, might signal that the ECB is well on track to raise interest rates late next year, Bloomberg reported.

Dragi’s comments could be viewed as bullish in some respects, because if inflation is advancing in Europe, it’s a possible sign of economic vigor. U.S. companies could use a robust Europe to buy their products. “Underlying inflation is expected to increase further over the coming months as the tightening labor market is pushing up wage growth,” Draghi said on Monday. “Domestic price pressures are strengthening and broadening.”

The dollar index was about flat as the euro advanced, but the greenback remains down from highs earlier this year. A weaker dollar can sometimes be bullish for U.S. stocks.

While the dollar treaded water, U.S. yields rose sharply after Draghi’s remarks. The U.S. two-year yield hit its highest level since June 2008 at above 2.84 percent. To put things in perspective, that’s one basis point above where the 10-year yield traded on the last day of August. This sort of action could raise concerns about a possible “inversion” scenario in which shorter-term yields start to go higher than long-term yields. In the past, this has often accompanied economic slowdowns, though debate rages about whether that’s related. Remember, correlation doesn’t always mean causation.

In any case, the 10-year yield also inched higher, hitting 3.1 percent early Tuesday and remaining near four-month highs as the Fed meeting approached. Odds for a fourth rate hike in 2018 remain above 80 percent, futures prices indicate. It might be interesting to watch what the futures market indicates about possible future rate increases Wednesday afternoon, assuming the Fed does hike. Some investors view March as another possible rate increase date, which would mean the Fed basically raising rates every quarter.

Market Welcomes New Sector

Despite a sharp drop for the Dow Jones Industrial Average ($DJI) from last week’s record highs, not all the news was bad on Wall Street Monday. The Nasdaq (COMP) managed to climb out of adversity and finish a touch higher, and the S&P 500 (SPX) clawed back from its early lows to finish just moderately weaker.

The new Communication Services sector had some winning performances on day one, with most of the major tech firms that have now live on “communication row” posting gains (see more below). One question going forward is how the consumer discretionary and technology sectors might fare now that some of their most closely followed names are gone. That’s something that might be interesting to follow over the next few weeks.

The other outside factor affecting U.S. markets Monday appeared to be more political noise out of Washington, D.C., and ratcheting trade barbs between the U.S. and China. Until earnings begin next month, it wouldn’t be surprising to see this sort of “headline risk” keep volatility on the march, and sure enough, VIX—which had sunk to summer lows down near 11 last week—bounced back above 12 on Monday. Still, if you put it in perspective, this is still relatively light volatility in a historic sense, so it appears investors aren’t overly concerned about whatever news is coming out of Washington. The fact that VIX finished the day well off its highs is another thought to consider pondering.

Don’t count out oil prices as a possible factor this week. U.S. crude futures climbed above $72 a barrel early Tuesday and Brent crude is now trading at above $80. Worries about falling Iranian supplies and whether the Russians and Saudis can make up for those missing barrels continue to buff up the market. Gas prices in the U.S. reached nearly $2.90 last week and are near four-year highs. If consumers have to spend more on gas, that could potentially cut into consumer discretionary firms’ business. An OPEC meeting closed Monday with no pledge to increase production. Some analysts had expected a possible output increase agreement.

Figure 1: Climbing Commodities: Copper, sometimes seen as a barometer of economic activity due to its use in so many industrial products, is marching higher over the last month. At the same time, U.S. crude oil (purple line), recovered from recent lows and now appears to be making a test of its 2018 highs. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Welcome Home

After falling in July, the question is whether U.S. new home sales rebounded in August. Investors could find out early Wednesday when August data bow. Going into the report, analysts project just a smidgen of a rise in the seasonally-adjusted number to 630,000, from 627,000 in July, according to a Briefing.com consensus. Notable in July was a dramatic 52 percent drop in one region: the Northeast. The Midwest and West actually experienced higher sales, and the South fell just a little, but that weak Northeast number appeared to help sink the entire ship. It seems possible that high prices might be clamping demand for new homes in some areas, as the average sales price increased 5.9 percent year-over-year in July to $394,300. One question is whether prices can keep scampering higher even as demand appears to run into some barriers.

Brexit Deal Hits “Impasse”

The dreaded “B” word that helped send a chill through world markets two years ago could become more of a factor in the coming months after getting pushed to the back pages for a while. With just six months until Brexit takes effect, Britain still hasn’t reached a trade deal with the European Union, and both sides are firing barbs. Last week, British Prime Minister Theresa May raised concern when she said negotiations are “at an impasse.” EU leaders have said they want a deal wrapped up by November so they can have the proper time to implement it by the time Britain formally leaves the bloc in late March, The Wall Street Journal reported.

Though some U.S. investors might be inclined to watch the battle from afar, they shouldn’t necessarily be sanguine about possible impact if talks fall apart. That could hit the pound and potentially the euro pretty hard and also negatively affect some U.S. stocks—including banks that have set up big operations in London to sell products to the EU. The dollar might get a boost as investors seek shelter, a potential bearish development for U.S. multinationals. Bond prices might also get a boost, sending yields lower. While it’s probably too early to get really worried, investors might want to monitor developments over the next few weeks and think through how a worst-case scenario might affect them.

Hello, My Name is Communication Services

First days can sometimes be awkward, with people squinting at your name tag to see who you are. Monday was the first day for new S&P 500 sector Communication Services, and the results looked good for a debut. Some of the major stocks now in the sector, including Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL), Netflix, Inc. (NASDAQ: NFLX), and Facebook, Inc. (NASDAQ: FB) finished solidly higher Monday. Walt Disney Co. (NYSE: DIS) and Twenty-FIrst Century Fox Inc. (NYSE: FOXA) were other top performers. There appeared to be some buying pressure, especially for NFLX, perhaps because it was the first day for the new sector. Maybe we’ll see if there’s follow-through today or if it was a one-day rebalancing for NFLX, which had slid last Friday. NFLX might also have drawn support due to a Wall Street Journal report over the weekend that Apple Inc, (NASDAQ: AAPL) is veering toward more “family-friendly” content for video streaming, perhaps giving NFLX an advantage with some viewers.

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